Cadence Design Systems 2026 Q3 Earnings Call

I'd like to welcome everyone to our third quarter of 2026 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary, and today's earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them.

In addition, all financial measures discussed on this call are non-GAAP, unless otherwise specified. The non-GAAP measures should not be considered in isolation from, or as a substitute for, GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today's earnings release. For the Q&A session today, we would ask that you observe a limit of 1 question only. If time permits, you can re-queue with additional questions. Now, I'll turn the call over to Anirudh.

Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that Cadence delivered another outstanding quarter, with all key metrics coming in well above our guidance. Backlog reached a record of $8.2 billion, reflecting strong bookings driven by growing customer demand. Given our strong business momentum, expanding technology leadership, and compelling AI growth opportunities, we are raising our revenue outlook for the year to 21% growth and our EPS outlook by $0.30 to $8.40. John will provide more details on both our Q3 results and the updated financial outlook. Agentic AI represents a transformational market opportunity, and Cadence is exceptionally well-positioned to capitalize on it.

Our differentiated three-layer framework is anchored by our physically accurate simulation and optimization engines in the critical middle layer, tightly integrated with AI agents and orchestration at the top, and accelerated compute and proprietary data at the base. Agentic AI continues to evolve at a remarkable pace, with our AI Super Agents gaining strong traction. We are now addressing the longstanding customer demand for domain-specialized models. We believe the future of agentic AI-based design is increasingly domain-specialized models, combined with intelligent model routing for performance and reinforcement learning loops with underlying tools for recursive self-improvement. Today, I am excited to introduce Maestro, a portfolio of domain-specialized AI models purpose-built for chip and system design. By controlling all three layers, our AI Super Agents, Maestro models, and proven EDA and SDA tools, we are uniquely positioned to deliver optimal performance, efficiency, and throughput results for our customers.

Initial results are very compelling, demonstrating up to 30% higher quality and up to 5X greater token efficiency versus general-purpose foundation models. Moreover, the Maestro models can be further post-trained on customers' proprietary data to deliver even better outcomes. Our model router chooses among our models and other leading frontier and open-weight models as needed for optimal results. Customers can opt to deploy Maestro models in the cloud or in their on-prem environment. Maestro is gaining strong early customer traction, with several deployments underway. Momentum of our AI Super Agents continues to accelerate, with compelling early results and more than 100 active customer engagements. We added a new agent to ChipStack for RTL generation and early PPA optimization. That created RTL delivering an average of 24% area and 18% power reduction versus pure foundation model-generated code.

Importantly, this demonstrates the power of combining our AI Super Agents with AI models and our underlying EDA engines to achieve outcomes that foundation models alone cannot deliver. Honda is using the RTL generation agent and AI-powered automation to improve productivity from specification to RTL development. In Q3, MediaTek deployed ChipStack into its production digital verification flow, achieving 50% to 70% improvement in verification coverage and 1.4 to 2X reduction in engineering effort, with deployment now scaling across design teams. In analog and custom design, ViraStack saw a 4X increase in customer engagement with deployments in various production designs at multiple customers. The combination of agentic workflow, embedded skills, and our Virtuoso platform is unlocking significant new productivity opportunities in a traditionally difficult-to-automate domain. We are seeing strong customer interest in InnoStack, our digital AI Super Agent, as customers push to improve PPA, accelerate design closure, and boost productivity.

In Q3, the Renesas MCU team successfully deployed InnoStack across a wide range of engineering tasks, achieving a 34X productivity improvement, with plans to expand its usage to layout automation. Also in Q3, Samsung Foundry successfully used InnoStack to dramatically improve engineering efficiency and accelerate PPA exploration, reshaping its approach to technology migration and DTCO optimization. Socionext is deploying InnoStack in its production design environment, and expects its combination with our advanced physical design tools to deliver up to a 5X overall productivity gain while maintaining design quality. In PCB and 3D IC design, the early response to our AuraStack AI Super Agent has been overwhelmingly positive. Nokia is deploying AuraStack on our Millennium supercomputer to advance electronic system design at scale. By unifying agentic AI, our physics-based solvers, and accelerated compute in a secure on-prem platform, Nokia is achieving a 5X acceleration in key design and analysis workflows.

Moving on to our businesses, we are delighted that all product groups delivered outstanding results, with year-over-year revenue growth of 20% in core EDA, 24% in IP, and 30% in SDA. Accelerating design activity continues to drive strong demand for our core EDA, SDA, and IP products. At the same time, we are seeing amazing customer momentum for our agentic AI portfolio, which is also fueling increased demand for our underlying products. We are pleased that recurring revenue sustained its strong momentum, growing 18% year-over-year. I am particularly proud of the significant wide-ranging agreements we have signed with top customers. We furthered our long-standing partnership with a global marquee systems customer through a significant wide-ranging expansion of our core EDA, hardware, and SDA solutions.

In Q3, Cadence and a top telco deepened their long-term strategic partnership with a broad expansion across our AI offerings, EDA software, hardware, and SDA solutions, establishing Cadence as their primary design partner. Core EDA revenue growth was driven by broad-based trends across the portfolio. Our digital and signoff business continued to expand, achieving 16 new full flow wins during the quarter. As agentic flows increasingly require full vertical workflows, there is growing demand for our synthesis and signoff solutions. Our signoff product saw growing adoption, and our verification software product had strong growth in big digital and memory designs, with increasing usage at major hyperscaler and memory companies. As AI and HPC designs continue to grow in scale and complexity, hardware-assisted verification has become an increasingly strategic capability for our customers.

This is driving sustained, unprecedented demand for our Palladium and Protium emulation platforms, which delivered yet another record quarter. We added several new logos and saw a meaningful expansion with marquee customers across a wide range of verticals. Our hardware cloud offering showed strong growth, with a leading semiconductor company adopting more hardware cloud services to accelerate new product development. In analog and custom design, Spectre FX continues to gain momentum, highlighted by major competitive displacement at a marquee infrastructure silicon provider, with multiple new 2-nanometer projects adopting our platform. Our IP business delivered another outstanding quarter, driven by deepening engagements with leading hyperscalers and semi customers. We continue to benefit from strong AI-driven tailwinds, fueling accelerating AI infrastructure investments, growing adoption of custom silicon, and increasing demand for high-performance IP.

Along with the transition to advanced nodes and chiplet-based architectures, these AI-driven trends are creating a strong pull for our differentiated Star IP portfolio across interface, memory, and foundation IP. We are well-positioned for sustained growth as we continue to deliver superior power, performance, and area across our expanding advanced IP portfolio. A leading space technology company selected our IP portfolio for their custom chip program, paving the way for a broader services and silicon engagement. Tensilica delivered a record revenue quarter, and we announced a joint development with Analog Devices across next-generation audio applications. Our system design and analysis business delivered another strong quarter, driven by growing adoption of our integrated solutions and proliferation of our expanded electronics and physical systems intelligence portfolio. Allegro momentum continued, including a competitive displacement at a leading EV customer that chose Cadence's integrated PCB design and multiphysics analysis platform as its primary solution.

Our Millennium platform had strong adoption, driven by deployment of our GPU-accelerated electronic and mechanical system suite, along with our Reality digital twin solution. During the quarter, Switch, a leader in sustainable high-density AI infrastructure, selected our Millennium and Reality digital twin solutions to advance the design and simulation of its next-generation AI factories. The MSC business is an integral part of our physical AI strategy, and its integration is progressing well. MSC Adams, our industry-leading multi-body dynamic solution, helped secure a competitive displacement at a leading power company, along with adoption of other Cadence products. In summary, Cadence delivered exceptional Q3, and I am delighted with the accelerating momentum of our business. We are executing extremely well in a vibrant AI market, have our strongest competitive position ever, and are extending our leadership in AI.

Our highly recurring and ratable business model, combined with growing customer R&D investments, is positioning us very well for continued strength in this dynamic AI environment. With that, I will turn it over to John to provide more details on our Q3 results and our updated 2026 outlook.